Short sales and modifications- the system is not working, still…

I read with fascination this New York Times article detailing a horror story where a mortgage loan servicer approved a short sale and after the closing reneged, sending back the agreed upon sale proceeds. I wish I could report that this is an isolated incident. In fact, what I have seen and what I am hearing is that mortgage servicers who deal with loan modifications and short sales are too often disorganized, dysfunctional or worse. Example: a mortgage modification with substantial principal reduction is sent to borrowers who then sign all the papers and send them back via overnight mail, with proof of delivery. They go to bankruptcy court and get court approval, on notice to the lender. The lender claims they never got the papers. They send letters making spurious claims that conditions are not met. They send threatening default letters, even though payments are being made. Even when the papers are all re-signed and re-sent using THEIR FedEx envelope, they claim they never got the papers.

Anyone who does much of this work has similar stories.

Why this happens is anyone’s guess. The suggestion is that the loan modification process ought to be taken out of the hands of the lenders or servicers, and put in the hands of a single agency that applies consistent standards. The agency is already in place: the bankruptcy courts. The authority can be limited to existing mortgages in default, so that new mortgage lending is not affected.

The New Jersey Bankruptcy Court already has a voluntary Loss Mitigation process in place, where all the documents are uploaded to an independent web portal, so there is never any claim or question about what was sent and received or when because it is all there for all the participants to see. And the process requires a designated single contact person with authority.

All we need to do is give the Court the authority to restructure the mortgage in Chapter 13. This is not that different from the court’s existing work. The lender/investors would see more income. More borrowers would be able and willing to save their homes. Less foreclosed or unsold inventory. Who are the losers? Servicers whose contracts pay them per loan, even for those in default. And all those companies and professionals who do foreclosures.

Until we have a rational, efficient and predictable system to deal with defaults on securitized loans, the current mess will continue.

By the way, as an historical aside, we had something similar in the late 1980’s with massive Savings and Loan closures. The solution there was to give their assets to the Resolution Trust Corporation which by all accounts did an efficient job of liquidation and recovery.

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